The Leasehold 'Property Trap'

There have been recent reports in the media concerning the leasehold ‘property trap’ that buyers of leasehold properties may face.

What is a Leasehold property?

It is a property which is owned by way of a lease and the owner of the lease is known as the leaseholder. The leaseholder has the right to own and occupy the property for a set number of years in accordance with the lease.

Importantly, the leaseholder does not own the ground upon which the property is built. The owner of the ground is called the freeholder.

Leaseholds are most commonly found when buying flats. However, houses can also be sold as leasehold, usually through shared ownership schemes.

What has been happening recently?

In recent years some developers of new build properties have been selling new houses as leaseholds and the developers have then sold the freehold to the house to third parties, without even telling the leaseholder.

The sale of the freehold by the developer to third parties, although undoubtedly unethical, is perfectly legal.

What is the problem?

The main problem when the developer sells the freehold to a third party is that the third party is buying the freehold as an investment and will seek to charge a much higher price for the homeowner / leaseholder who may wish to buy the freehold. This may put off potential future buyers of the property.

Are there any other potential pitfalls to look out for?

Ground rent – clauses incorporating ground rent can often be very complex and detailed and may be hiding excessive increases in ground rent charges;

Service charges – charges for services provided by the freeholder may be costly and disproportionate to the work carried out;

Buildings insurance – you will generally be required to make a contribution towards buildings insurance, the cost of which you will have no control over;

Lease length – if you end up with a lease which only has 70 years or less left to run you may struggle to sell it and if you wish to buy a short lease, you will struggle to get a mortgage if required; and

Freeholder permission – it can be the case that even the smallest of alterations to the property require the permission of the freeholder, effectively taking away and controlling your ability to change the property to your liking and needs.

What can I do about it?

Prevention is better than cure! The best thing you can do is receive comprehensive legal advice, explained in plain English, if you are considering buying a leasehold property.

If you already own a leasehold property and have concerns, then any potential remedies available will depend on the type of property and lease in question.

Finally, leasehold properties are not inherently bad… There are plenty of fair leases with happy leaseholders occupying them! This article just highlights a number of situations where leaseholders may have cause for concern.

If you would like advice in relation to any issue discussed in this article or any other Property matter, please contact your most convenient office and ask to speak to a member of our Property law team.